Who Pays the Income Tax When You Receive Money for Someone Else's Trust?

Question from JEAN IN HAMPTON, SC

If you receive money from an estate in trust for another individual, who pays the income tax--or is this money tax exempt?

Expert Answer by Liza Hanks

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Liza Hanks is the founder and owner of FamilyWorks Estate Planning, a law firm with offices in Campbell and Los Altos, California, and the author of The Busy Family's Guide to Estate Planning (Nolo, 2007).

Accounting for trust income tax can be really complicated.

The basic rule is that, for distributions of trust income, the income tax is paid, up to a certain point, by the person who receives the distribution at his or her individual income tax rates.

After a certain cut-off point, the trust pays the income tax due at its tax rate, which is almost always higher than an individual's tax rate.

Distributions of trust principal are not subject to the income tax.

To get specific help with your situation, consider consulting someone experienced in fiduciary accounting, which is what trust accounting is called.